May 12, 2021

What to Know Before Closing Your Business

There are numerous reasons why you might want to close your business. Some, like filing for bankruptcy, are more coerced and far less pleasant than others, like deciding to retire. No matter the cause, your reasons for closing your business will shape your shutdown process.

How you close your business will be complicated by the nuances of your situation—maybe you’re selling your business to someone in your family, for example. However, there’s a general checklist you’ll want to follow when closing down, regardless of your reason.

There might be situations where you simply want to close your business: for example, if you’re a freelancer who got a full-time job for a new employer. In many cases, though, you’ll be looking to sell your business or otherwise transfer ownership to someone else.

In more extreme cases, your business might be facing bankruptcy or liquidation.

In all of these scenarios, there are some common steps you should take to close your business. 

Selling Your Business

If you want to sell your business, seek an accurate business valuation of your company first, then seek prospective buyers.

Your valuation should take into consideration your assets and property, as well as less tangible factors like brand presence, market share, customer data, and projected revenue.

Valuating your business is a skill in itself. There are 3 main ways to measure a company’s worth: by income, by the market, and by assets.

Sales Agreements and Transferring Ownership

You’ll need an official sales agreement to sell your business, and you should consult an attorney when creating this document. A sales agreement should list all inventory and assets as well as any relevant fees. You’ll need to determine how the business will operate until the new owner takes over, too.

Though you can transfer ownership outright through a sale, you may opt to sell your business over time through a gradual sale, especially if a buyer can’t afford the business all at once. You can also sign a lease agreement for your business if you want some time away but plan to come back.

Closing Time

If you want to close your business, there are a few general steps you should take to ensure a smooth transition. Some of these are required by law, while others are best practice.

Decide to Close

This can be a hard decision and, unless you are a sole proprietor, one that will require agreement from other partners and stakeholders. Initially, it’s smart to share your decision with as few people as possible and determine how you will make your announcement to your creditors, employees, customers, and the public. Your articles of organization should outline how to close down—follow this document and record everything with a written agreement.

Collect Accounts Receivable

If you have outstanding customer invoices, push to get paid before making any sort of closing announcement. It can be harder to get the full amount owed to you if payees know you’re about to shut down.

File Dissolution Documentation

You need to legally dissolve your LLC or corporation in any state where you are registered for business. Failure to do so could result in continued taxation and registration fees.

Cancel Licensure

Along with dissolving your company with state agencies, cancel any applicable registrations, permits, licenses, and business names. You should cancel anything, including your trade name, that you will no longer need once the business closes.

Notify Creditors and Cancel Commercial Leases

Depending on your state, a notice to your creditors that you are closing usually limits the time they can collect on debts.

Alert Your Employees and Comply With All Labor Laws

If you have employees, they’ll be the most impacted by your company’s closure. Ethically, it’s best to alert them to the situation as soon as you make the decision to close. You might have reasons for keeping your workers in the dark as long as legally possible, but you’re dealing with people’s livelihoods—consider how you’d feel in their situation. Consult federal and state labor laws, and ensure that you comply with the Worker Adjustment and Retraining Notification Act for paying employees post-closing.

Notify Customers

By notifying your customers, you can deal with any remaining contractual agreements quickly. You might also throw a Going Out of Business sale to drum up some last-minute revenue.

Balance Your Outstanding Financial Obligations

This step will be highly impacted by your sales agreement, bankruptcy, and liquidation. Handle your final income and sales tax returns. Notify the Internal Revenue Service and state tax agencies and cancel your Employer Identification Number (EIN). The IRS has a checklist for closing businesses.

Maintain Detailed Records

Depending on your business, you are legally mandated to maintain tax and employment records, and keeping all documentation related to your business’s closure is smart no matter what. You should maintain these records for at least 3 years, but keeping them for 7 to 10 years—at least—is best practice for filing guidelines.

Bankruptcy

If you have a large debt load and resolute creditors, bankruptcy might be your best option for closing down your business. In some cases, it might be your only option, although it shouldn’t be considered lightly.

If you plan on declaring bankruptcy, you should do that before taking any other steps in closing your business. Most businesses, though, do not have to declare bankruptcy in order to close down.

Liquidation

Along with bankruptcy, liquidation is usually a last-resort measure for shuttering a small business. A business might opt for liquidation if no buyers appear to be interested. Through liquidation, your business is basically sold for parts, either to a few buyers or to many, like in an auction. Before going this route, a small business must make sure agreements are reached with all creditors and shareholders.  

About the author

Barry Eitel
Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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